Inherited IRA Tax Implications

Arcoms

My wife inherited three IRAs after her brother passed away in 2022. The total value of the IRAs was approx $450k and these were rolled over to inherited IRAs with Charles Schwab.

At the time we were advised to withdraw one pension per year as lump sums to minimise tax and that the lump sums would be taxed in the US but tax free in the UK. We have so far withdrawn one lump sum in March 2024 (approx $195k).

We have now been advised that HMRC have redefined what a lump sum and that the above is no longer true. We have also been advised that although there was no UK tax liability for the lump sum withdrawal, my wife should have completed a self-assessent and declared it to HMRC.

We are at a bit of a loss where to turn to now and worried we may be hit with a large tax bill by HMRC.  Can anybody offer any advice on the above or recommend somewhere who may be able to help?

Many thanks

Dazed_and_C0nfused

Arcoms said:

My wife inherited three IRAs after her brother passed away in 2022. The total value of the IRAs was approx $450k and these were rolled over to inherited IRAs with Charles Schwab.

At the time we were advised to withdraw one pension per year as lump sums to minimise tax and that the lump sums would be taxed in the US but tax free in the UK. We have so far withdrawn one lump sum in March 2024 (approx $195k).

We have now been advised that HMRC have redefined what a lump sum and that the above is no longer true. We have also been advised that although there was no UK tax liability for the lump sum withdrawal, my wife should have completed a self-assessent and declared it to HMRC.

We are at a bit of a loss where to turn to now and worried we may be hit with a large tax bill by HMRC.  Can anybody offer any advice on the above or recommend somewhere who may be able to help?

Many thanks

Wouldn't the person who advised you of all that be the best place to start?

QrizB

Paging @Bostonerimus1 and @EdSwippet to this thread?

poseidon1

Whilst awaiting specific input from the more qualified on this forum, the attached general guidance on US/UK tax treatment of different American retirement accounts maybe of interest, together with suggested options open to inheritors of such benefits.


https://edale.co/us-inheritance-uk-beneficiary/#:~:text=Inherited IRA distributions are taxed,your current income tax rate.

Bostonerimus1

What is the new HMRC definition of a lump sum?

You can avoid UK tax on distributions from US IRAs by taking a lump sum: in the US that usually means the total value of the IRA, but in the UK it has meant any non-periodic, irregular, or abnormal pension payment.  So as you are only claiming tax exemption under the Tax Treaty in the UK you would file a self assessment claiming treaty exemption from UK tax under Article 17.2. On the US side you'd file a 1040NR and pay tax on whatever amount you withdrew from the IRA.

Arcoms

Thanks for your comment @Bostonerimus1.

I can't post the link I was given regarding HMRCs updated definition of a lump sum but if you google INTM163160 - Pensions - Lump Sums it will be the first hit

I believe the upshot of this is that pension lump sum payments are now taxable in the UK but you are able to claim a credit for any tax paid in the US

poseidon1

Arcoms said:

Thanks for your comment @Bostonerimus1.

I can't post the link I was given regarding HMRCs updated definition of a lump sum but if you google INTM163160 - Pensions - Lump Sums it will be the first hit

I believe the upshot of this is that pension lump sum payments are now taxable in the UK but you are able to claim a credit for any tax paid in the US

The article from Edale also indicates that this is the likely UK treatment of an inherited IRA from a non spouse.

Therefore sounds like  30% US tax  deducted  from the amount received is available as a credit against UK higher rate taxes.

Worth noting from the article that the IRA recipient has up to 10 years post death to withdraw the funds ( as and when they wish), so this may present opportunities to manage  and spread UK tax exposure on the residual funds over next 7 years or so.

Cook_County

This is an area on which I advise professionally many times every month. I have also had numerous meetings with senior HMRC policymakers over the last dozen years. HMRC interpret the treaty as giving the right to the UK to charge tax, but with credit for the actual tax due in the US (not the 30% withheld). In essence file both US & UK tax returns, the UK will give a credit for any US tax payable.

Arcoms

Thanks for your comments @poseidon1 and @Cook_County.  I have arranged a meeting with a US/UK tax advisor on Monday so will hopefully get full clarity then.

My main concern currently is the implications of not filing a tax return last year and declaring the lump sum taken in March 2024. I mistakenly assumed that as no tax would be due in the UK due to the treaty exemption under Article 17.2, a tax return would not be required.

I guess I'll discover my fate on Monday :-/

Bostonerimus1

Cook_County said:

This is an area on which I advise professionally many times every month. I have also had numerous meetings with senior HMRC policymakers over the last dozen years. HMRC interpret the treaty as giving the right to the UK to charge tax, but with credit for the actual tax due in the US (not the 30% withheld). In essence file both US & UK tax returns, the UK will give a credit for any US tax payable.

So is HMRC now using the Savings Clause to over-ride Article 17.2?

Bostonerimus1

Arcoms said:

Thanks for your comments @poseidon1 and @Cook_County.  I have arranged a meeting with a US/UK tax advisor on Monday so will hopefully get full clarity then.

My main concern currently is the implications of not filing a tax return last year and declaring the lump sum taken in March 2024. I mistakenly assumed that as no tax would be due in the UK due to the treaty exemption under Article 17.2, a tax return would not be required.

I guess I'll discover my fate on Monday :-/

If you are taking a Tax Treaty position you should file a tax return to explain.